Allow me to be your Dad for a minute and tell you that if you haven’t setup a Roth IRA yet, then what are you doing?!
Seriously, if you’re trying to figure out what to do differently with your money this year, how about putting in something that will grow tax free! Whether you know much about investing or money, read on as I explain all the essential Roth IRA basics and what you need to know to make the most of them.
We all know that we should be saving more money for retirement, but how do you make that happen? How do you go from nothing to maxing out all our tax-advantaged savings options like your employer sponsored retirement plan or individual retirement account (IRA)?
As I’ve mentioned in previous posts, my wife and I have been on this path for sometime. I’m proud to say that we currently have reached the maximum amount allowed for my 401k and for our Roth IRA’s. It wasn’t easy, but looking back I’m sure glad we did it!
So what steps did we take along the way to get to this point? Here is the strategy we used:
When you’re creating your “money design”, there are a lot of options for income streams available to you at retirement. Depending on how early you plan to retire, it will be very important to know what the minimum age is you can start withdrawing your funds. The rules may influence the number of options on the table as well as have important legal and penalty implications.
Using irs.gov and several other websites, the following chart is an overlay of all the popular traditional retirement plans and when they can become available.
Welcome to Part 3 of this series of posts. In Part 1, we introduced the concept of an IRA and defined the differences between a Traditional and a Roth. In Part 2, using an example by Charles Farrell from his book “Your Money Ratios: 8 Simple Tools for Financial Security at Every Stage in Life”, we found that fundamentally both types of funds are the same because they will both yield you the same amount of money after all is said and done. The real advantage is what you believe your tax situation will be later on in life.
However, I told you I would find the twist in this argument and I will present it to you now:
In Part 1, we introduced what an IRA is and the differences between a Traditional and a Roth. Although each one has its own unique tax benefits, you were probably left wondering which one is better. In this post, we’ll put some numbers to paper to illustrate what will happen to our money depending on which route we take.
Crunching the Numbers – An Example:
This example comes to us from a truly great book called “Your Money Ratios: 8 Simple Tools for Financial Security at Every Stage in Life” by Charles Farrell. In the chapter on IRA’s, Farrell weighs in his opinion on which type of fund he feels is better:
Congratulations if you are investigating, considering, or have already opened an IRA. If you are new to this subject, then this series of posts will be for you. To start, an IRA (Individual Retirement Account) is a special type of financial account that gives you special tax privileges. Although it is typically used for saving towards your retirement, it can serve a variety of purposes and save you a ton of money in taxes.
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